Fonehouse's franchising project

Since Fonehouse got the go-ahead from T-Mobile to franchise its business in May, the retailer has been busy signing up independent dealers in London. So far, the company has persuaded 12 dealers to rebrand their shops and become Fonehouse stores. The aim is to get another 35 this year.

Under the franchise agreement, Fonehouse takes a share of the commission dealers make from connections and, in return, allows the dealer to use the brand. The company also provides the dealers with handsets and airtime, as well as marketing and sales advice.

Franchising gives the small retail chain the opportunity to open new shops with little risk. The company has been around for almost 15 years and has a turnover of around £20m per year, so the brand has a significant value attached to it. The biggest worry for Fonehouse MD Clive Bayley is that the name gets tarnished, so the company is only going after the very best dealers.

He says: ‘There is less risk for us because we don’t own the lease and we are not directly employing the staff.

‘But the biggest challenge is finding the right partners. Damage to the Fonehouse brand is the biggest risk we are taking with this. We have to comply with T-Mobile’s specifications and we have to make sure that every dealer we sign up adheres to these. We check the dealers and ask networks if there have been any problems with them. We know most people in the industry so we can easily find out if they are not good.’

While ensuring the quality of the dealers it works with, Fonehouse is rejecting up to 30%-40% of independents applying for the franchising program. Dan Schama, the manager of the franchising project at Fonehouse, reveals that some of the most common reasons dealers get turned down are box breaking and selling stock they shouldn’t be selling.

‘We work hard for the quality. If someone asks “can I still box break?” or they have a hundred boxes in the back, you know it’s not for them,’ he says.

Cashback, another recent scandal in the mobile industry, is something Bayley prefers to stay clear of. ‘If the dealers have to do it we do it for them, but we only do automatic cashback,’ he says.

Distributor conflictFonehouse’s pursuit of picking the best dealers has got distributors accusing the retailer of stepping on their toes, saying the franchising business is ‘nothing more than a glorified distribution deal’ and ‘sub-dealing on a massive scale’. Fonehouse provides the franchised dealers with airtime and handsets, completely cutting out distributors.

The majority of Fonehouse’s connections are T-Mobile, and T-Mobile’s airtime distributors have been hit hardest by the franchising ventures.

Fonehouse has taken staff from distribution too. Hugh Symons Communications lost Andy Lockwood earlier in the year, and last week regional sales manager Sid Abbey decided to leave the company to join Fonehouse to help with the franchise operation.

However, Bayley says the accusations that Fonehouse is trying to be a distributor are completely unfounded.

‘It’s absolutely, categorically not a glorified distribution deal. We want to expand our retail chain and we want to do that with our own stores and with our partner stores. This is not a distribution deal but full-on retail. It’s just like what O2 and McDonald’s are doing with their brand.’

Bayley says that Fonehouse is not only going after dealers that are part of a distributor’s client base, but it is also offering partnerships to dealers that otherwise wouldn’t enter the market and are not on the distributors’ radar.

He says: ‘We are not just going after existing dealers, we are going after new entrants as well. There are a lot of people that want to run their own shop but don’t have a hope in hell of going against Carphone, and the distributors are not even talking to them. If we had to open another 20 of our own stores, it would have been the same.’

However, it is impossible to deny that Fonehouse and distributors are now competing for the best dealers.

But from the dealers’ point of view, Fonehouse brings everything in one package. One franchised dealer says: ‘Ultimately, they are our distributor, but because you are riding under the same name they do go that little bit further. One year ago we wouldn’t have dreamed of doing this, but distributors have been falling off the tree like leaves. Fonehouse has sent accountants in, they’ve got business cards and carrier bags ready for us. I’ve never had any support like this from any distributor.’

And it is the consolidation and general difficulties in the distribution market that have allowed Fonehouse to go ahead with the franchising project. Two years ago, distributors were still on a much stronger footing and dealers were also doing well. Now there is space for Fonehouse to come in and act as a franchiser, distributing airtime and handsets, because distributors are in a weaker position and dealers are so squeezed that they are happy to have all the help they can get.

Retention not churnDealers signing up for the franchise deal will have to up their game, but will receive support from Fonehouse. One of the biggest changes for the dealers is in their business model, which, as a primarily T-Mobile retailer, has to focus on retention rather than churn and sales.

Bayley says: ‘We only bring in dealers that understand that churn is yesterday’s business model. We show them that retention is a long-term play and ultimately we make more money out of retention than churn.’

Networks have shifted their strategies from new customer acquisition to retention, and are reducing the commission gap between new sales and upgrades. Dealers have already been adjusting their business model accordingly.

The franchised dealer says: ‘We got away from churning customers to the networks that pay the most and learned that there is value in retention. It changes the sales style and cuts volume, but now we focus on quality.’

Outside LondonIndependent dealers bring their biggest competitive advantage to Fonehouse – the relationship and understanding they have of the local community. As a London-based company, Bayley is very keen to expand business to outside the M25, and says that he wants to find dealers that would also take Fonehouse to the North.

Schama says: ‘We can’t get to the local community. You have dealers in communities who speak the language and understand the religion of a community. You can’t understand the needs of different communities from a head office in Fulham.’

But the dealers have been serving the local communities under a different brand name, and some are worried that changing that could result in a loss of sales. The franchised dealer says: ‘It’s difficult for us to rebrand because we were established 10 years ago. Customers know us. Fonehouse wanted us to advertise in the local paper with a picture saying this was us before and this is us now.’

Fonehouse came up with another marketing strategy to get a life-size cardboard cut-out of the dealer and put it in the window to show that the shop was still run by the same people.

But there’s a limit to how far the franchised dealer is willing to go to rebrand. He says: ‘If Fonehouse went belly up that would affect everyone. The only thing that worries me is if they said “Carphone bought us”. I don’t think I’d like that.’